July 31, 2018 / 11:22 PM / in 15 days

Exclusive: Cosmax CEO says he has rejected two takeover offers, wants to stay independent

PANGYO, South Korea (Reuters) - South Korea’s Cosmax Inc (192820.KS), the world’s biggest cosmetics manufacturer, rejected buyout offers from two large local conglomerates in the past year and has no interest in selling as it expects continued revenue growth propelled by Asian demand, its chairman and chief executive told Reuters.

Lee Kyung-soo founder and chairman of Cosmax speaks during an interview with Reuters in Seoul, South Korea July 30, 2018. Picture taken July 30, 2018. REUTERS/Hyunjoo Jin

The company’s North Korean-born founder, Lee Kyung-soo, also said North Korea’s cosmetics market has great potential for growth and he would like to build a cosmetics factory there should South Korea and the United States guarantee business activity in the isolated state.

As global cosmetics brands snap up South Korea’s small but fast-growing cosmetics firms at hefty premiums, Cosmax and other contract manufacturers, which make products for the brands, are also attracting takeover interest, Lee said.

“I can easily sell the company if I want to,” 72-year-old Lee said in his office just south of Seoul on Monday, in his first interview with international media since founding the company in 1992.

“Because cosmetics brands often undergo sales fluctuations, some buyers think it’s safer to invest in manufacturers.”

After Lee's comments, shares of Cosmax jumped 7 percent in morning trade on Wednesday, and its holding company Cosmax BTI (044820.KS) climbed 4.3 percent as of 0045 GMT, outperforming other cosmetics shares and a 0.6 percent rise in the wider market .KS11.

L’Oréal (OREP.PA) acquired South Korea’s beauty and fashion firm Nanda Co earlier this year, joining Unilever (ULVR.L), Estee Lauder (EL.N) and other global companies in buying or investing in small South Korean cosmetics firms that are popular among Chinese millennials.

Contract manufacturers such as Cosmax have propelled the success of those smaller brands in South Korea, China and elsewhere, by radically shortening the time it takes to turn an idea into a new product on a store shelf.

Cosmax, which counts China’s top skincare brand Pechoin and France’s L’Oréal among its biggest customers, caters to a number of other customers ranging from the higher-end, such as Estee Lauder and Chanel, to South Korean brands like Nanda’s 3CE and LVMH-backed Clio (237880.KQ).

“If giant global companies want to launch products in a speedy manner, and do not want to miss out on the Chinese market, they have no choice but to turn to outside manufacturers, or buy companies which make such products,” Lee said.

Lee declined to say if foreign investors have approached Cosmax about a takeover, but said in the past year, two of South Korea’s large conglomerates offered to buy the company, which has a market value of more than 1.4 trillion won ($1.25 billion).

Lee declined to name the suitors, but added that Amorepacific Group (002790.KS), South Korea’s largest cosmetics powerhouse and also a Cosmax customer, is not one of them.

Several South Korean conglomerates own cosmetics brands or retailers. LG Group owns LG Household & Healthcare Ltd (051900.KS), which rank second behind Amorepacific in cosmetics sales, while retail giants CJ (001040.KS), Lotte (004990.KS) and Shinsegae (004170.KS) have cosmetics retail chains.

An LG spokesman said the company bought a small manufacturer, Zenisce, in 2015, but declined to comment further. A spokesman for CJ said it is not interested in buying cosmetics manufacturers, while Lotte and Shinsegae declined to comment.

REVENUE GROWTH SURGING

A former drugs sales man, Lee holds a 28 percent stake in Cosmax BTI (044820.KS), the holding company of Cosmax Inc. He said he wanted to grow the company further and eventually hand it over to his two sons, who each hold less than 3 percent stakes in the holding company.

Cosmax’ revenue increased 18 percent last year, the slowest growth for the company since 2007, the last year when data is available. It has consistently achieved annual growth of more than 20 percent over the past decade before a diplomatic row between Seoul and Beijing reduced Chinese demand for South Korean cosmetics in 2017.

Lee said he expects the company to return to blockbuster growth in the current fiscal year ending in December, with revenue seen rising 38 percent to 1.8 trillion won.

But shorter working hours introduced in South Korea this month, which put a legal cap on working hours at 52 hours per week from the previous 68, threatens to increase Cosmax’ labor costs as it now may have to hire more workers, he said.

Lee, who was born in North Korea in 1946 and fled to the South at the age of 5 during the 1950-1953 Korean War, says he wants to eventually tap into North Korea’s domestic cosmetic market, along with its skilled, low-paid workers, provided the conditions for investment are good.

In 2015, North Korean leader Kim Jong Un visited a cosmetics factory with his wife Ri Sol Ju, calling for improved quality of domestic cosmetics so that they can compete with “foreign brands,” the North’s state media KCNA reported.

“North Korean women are known to be beautiful. It would be really great if they use cheap, but quality cosmetics and become more beautiful, and more confident,” Lee said.

Reporting by Hyunjoo Jin; Editing by Soyoung Kim and Martin Howell

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